FxWirePro: Hedge EUR/CHF via call ratio spreads on ECB’s expansionary versus SNB’s defensive monetary policy approach as rallies to prolong but in snail’s pace

The Swiss National Bank (SNB) is likely to feel quite relaxed at its rate meeting tomorrow. EURCHF has now established itself above the 1.16 mark so that interventions against the franc have become unnecessary now.

As a result, the SNB is likely to repeat tomorrow that it merely considers the franc to be “highly valued”. In September it had first stopped referring to CHF as being “significantly overvalued”.

However, it will not want to cave in completely, it is still too early to do that and EURCHF would have to trade at much higher levels. Consequently, the SNB will continue to stress that it will be prepared at all times to intervene on the FX market. The SNB is likely to adjust its growth and inflation outlook to the upside tomorrow, but this will not lead to a change in its monetary policy. As long as the ECB remains expansionary the SNB will not want to risk making the franc more attractive again by normalizing its monetary policy. The inflation trend would have to be much better for that to happen as otherwise, any external shock would rekindle the risk of a return to negative prices.

In other words, despite the improved growth and inflation outlook, the SNB will not change its monetary policy tomorrow, it will continue to monitor EURCHF and hope that EURCHF will continue to rise, and will only actively intervene on the FX market if we see an appreciation shock in CHF.

Accordingly, we formulate suitable hedging framework contemplating all the above aspects. Place call ratio spread with 1:2 ratios.

How to execute: At spot reference: 1.1628, buy ITM (1.1480) +0.66 delta call with longer expiry (let’s say 2m tenor). Sell two lots of OTM strike calls (1.2065) of comparatively narrowed tenors (say 1m).

Thereby, we’ve formulated the strategy so as to sync ongoing technical trend with the bearish neutral risk reversals.

The delta value becomes more and more insensitive as the EURCHF falls lower and lower and hence on the lower side, the delta value is zero.

On the higher side, it increases in magnitude but remains negative indicating the negative effect on the options trader position with the pair rallying.

Why call ratio spread: The pair has been oscillating as you could observe in the rising channel pattern (made slumps and recovery), we see a neutral to the bullish environment when you are projecting decreasing volatility.

Currency Strength Index: FxWirePro's hourly EUR spot index is displaying shy above -67 levels (which is bearish). While hourly CHF spot index was inching towards 31 (neutral) while articulating (at 14:04 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest